Severance Taxes

Severance taxes are taxes on the extraction of natural resources (including oil and natural gas). These taxes constitute only a small percentage of state and local general revenue nationally, but are often a substantial share of revenue in a few, natural resource-rich states—notably, Alaska, North Dakota, and Wyoming.

How much revenue do state and local governments raise from severance taxes?

State and local governments collected a combined $13 billion in revenue from severance taxes in 2015, or less than 1 percent of general revenue.

However, this revenue was highly concentrated in a few states. Revenue in North Dakota and Texas accounted for more than half of national state and local severance tax revenue. And the tax was a major source of revenue in only three states: it accounted for 26 percent of North Dakota’s general revenues and 10 percent of Wyoming’s. (Although a large portion of total severance tax revenue, Texas’s severance taxes only provided 2 percent of its general revenue.)

Alaska typically depends on severance tax revenue more than any other state. However, the price and production of oil fell dramatically in 2015 and so did its tax revenue. In 2014, the state collected $2.5 billion in severance tax revenue, or 17 percent of its general revenue. In 2015, the state collected only $105 million in severance tax revenue, or 1 percent of its general revenue.

The volatility of severance taxes poses a challenge to states in which they are an important revenue source, requiring such states to have flexible budgeting arrangements, other readily exploitable revenue sources, or significant rainy-day funds to accommodate unforeseen changes in severance tax revenue flows.

In addition to Alaska, North Dakota, Texas, and Wyoming, only Louisiana, Montana, New Mexico, Oklahoma, and West Virginia collected more than 1 percent of general revenue from severance taxes. Another 25 states collected severance tax revenue but amounts that were less than 1 percent of general revenue. Sixteen states and the District of Columbia collected no severance tax revenue.